Sunday, July 17, 2011

A Case Study on the creation (and destruction) of competitive advantage in the Las Vegas Gaming Industry

The original pre-expansion HRH

Think back to 1995.... It was the year people just started to become aware of the internet, a huge stock market bubble was in its early stage, cell phones were starting to become less than the size of a brick, and OJ was found not guilty.... And 1995 was also the year that the Hard Rock Hotel (HRH) first opened its doors, and I was fortunate enough to be a part of the opening staff. It was a VERY different place back then – a very special place, a relatively small place, and an excellent example of the rise and fall of a unique business competitive advantage.

How an entrepreneur created competitive advantage, used it to exploit a market opportunity, and made a fortune in the process:

In the early 1990's, entrepreneur Peter Morton saw an unexploited opportunity in the Vegas market. What exactly was this unexploited opportunity? Well, it was at the intersection of a few trends – the first was a decline in the level of service, in general, throughout the Vegas market. The second trend was the growing wealth (at that time) of Generation X. This group of consumers was, totally underserved and ignored by market players in the Las Vegas hotel/casino/entertainment industry. The third trend was financial – the US economy was still on the front side of its credit bubble curves (a financial bubble that would eventually become bigger than what preceeded the great depression of the 1930's). And fourth, attitudinal trends were very conducive to the success of this kind of a venture: in many ways the late 90's were sort of like a combination of the roaring 20's and the 60's. People had good reasons to party, and the money to do so was readily available....

There are a few skills that, at a high level, enable entrepreneurs like Peter Morton to seize opportunity: 1) The ability to recognize an unexploited opportunity created by trends and current market forces/market players. 2) the ability to create a competitive advantage that is aligned to and utilizes (exploits) the unexploited opportunity created by those trends. And 3) the determination, charisma, vision, and leadership to rally a large group of people to execute an effective strategy.

#1 & #2 are a function of entrepreneurial ability and a keen understanding of market trends/dynamics and consumer preferences, with #2 also a function of entrepreneurial ability, “visionary” leadership, and the ability to create a competitive advantage that is aligned to and optimized for exploiting the opportunity. #3 is a function of individual competitive advantage. Mr. Morton was also a unique leader....I recall several conversations from the early years with him – he would routinely stroll through the casino to chat with employees or hang out with staff in the employee dining room in order to get a feel for what was happening on the front lines, and keep his thumb on the pulse of the market.

Organizational Culture: The Vital Factor

On the surface, the strategy for creating competitive advantage is simple – create an organizational culture that is aggressively aligned to utilizing the unexploited opportunity that has been ignored by competing firms and creates the then unprovided value proposition that is craved by consumers. This is easier said than done. The physical aspects of the building design were relatively easy. The most important ingredient was, of course, organizational culture. Why? Because organizational culture is the only source of sustainable competitive advantage in highly competitive markets. Anyone could build a hotel and make it look however they wanted, but it is the experience and feeling that people get when they interact with an organization that matters over time, and keeps them coming back. No matter how cool looking a hotel/casino is, if the service is bad and the the vibe is negative for customers-- it will struggle.... Sure, locational factors matters and branding can help overcome bad culture (in the short run), but a firm will operate far below its potential in such cases.

What is organizational culture? I have defined it elsewhere as the “chemistry” that arises between the interactions of the individuals’ and the organizational processes that comprise the operating framework of the firm, all in light of its leadership and interactions with customers.

The birth of an organizational culture...and the (initial) HRH competitive advantage.

In my view, HRH's initial success was a function of three main variables 1) “visionary” leadership 2) initial training, and 3) hiring the right people.

“In 1995, the Hard Rock Hotel opened its doors in Las Vegas, and the author was fortunate enough to be a part of its opening staff. Hard Rock Hotel owner & developer, Peter Morton, saw an opportunity to create a competitive advantage over other Las Vegas casinos. He would do this by creating as part of the plan an organizational culture that would, at least for the first couple of years, provide its guests with a new level of customer service.

The author dealing dice at HRH in 1995

Young & attractive employees with personality were hired, even if they had no prior casino work experience. Employees were hired based on personality, attitude, ability to learn, and of course, physical appearance. It did not take long for the Hard Rock, despite being located off the Las Vegas Strip, to gain the reputation of having the best service and most personable and attractive staff of any hotel/casino in Las Vegas.

Upper management purposely hired front line staff that would give an experience that was different from the norm. Young, hip, sexy, fun, & positive were the internal values an employee had to have to be hired at Hard Rock. It was these employee values which were aligned with Peter Morton’s vision and the overall marketing and business strategy, that were utilized in creating the organizational culture that initially served as Hard Rock’s competitive advantage.

Up to that point in time, many of the casinos had a reputation for having poor service. In general, Dealers and Pit Bosses had negative personalities. Miserable front line staff that had an attitude of entitlement were the norm. There was an unmet need in the marketplace, and Peter Morton exploited the market by purposely creating and applying an organizational culture that was optimized to exploit that unmet need. As part of pre-opening training, the front line staff at Hard Rock were instilled with Morton’s vision for organization culture. His number one value was “have fun, and make sure the guests have fun too….” Newly hired employees began to ask themselves the question “how can I apply myself to make this a fun place.” The result was a unique guest experience at each blackjack table, each restaurant, and each department as each individual employee brought forth and applied the best of what they as an individual had to offer.

When a player walked up to a table game in the casino they did not see a quiet dealer with his arms folded who didn’t want to be bothered. What they got was a smile and a “welcome to the Hard Rock” greeting. If a customer had a problem, front line staff met them head on with an attitude of empathy to solve the issue.

The design of the building, the organizational culture and employee values oozed into the atmosphere of the place, and it quickly became the coolest place to be. That atmosphere was why people chose the Hard Rock, and organizational culture is what drove the feeling in the atmosphere of the hotel.”

There was an intense initial focus on training, leadership, and setting the organizational culture, and the effects were quickly felt after opening in March, 2005 as the HRH developed a very loyal clientele. I remember one executive telling me “we could just shut down during the week and survive on our weekend business alone.” And that was probably a good thing because the place was usually empty during the weekdays, and indeed, aiming a strategy at a narrow target market entails risks such as this (t is, of course, oftentimes ideal to get as targeted as possible in the context of direct marketing). But of course, issues such as this can always be overcome with some creativity.

The rise and fall of a competitive advantage

But of course, nothing good lasts too long – without discipline and effort that is.... I described the decline in this way:

But Hard Rock’s competitive advantage was not to be sustained. Turnover in management and the front line staff combined with a lack of focus caused the culture and competitive advantage to suffer. New staff was not trained on the importance of sustaining the organizational culture and competitive advantage. Over time, the vision was lost. It was not long before it turned into just another casino. The Hard Rock Hotel became a shadow of its former self, and in the process lost a lot of its business glory to its competitors. Other casinos, such as George Maloof’s Palms Hotel, went on to create competitive advantages of their own and have eaten Hard Rock’s lunch. Hard Rock’s organizational culture grew weak, and this allowed its position in the marketplace to be overtaken. Despite this, Peter Morton profited handsomely from the real estate bubble and resulting increase in Las Vegas commercial property values, but one cannot help but think that the decline in Hard Rock’s competitive advantage played a role in his exit strategy….

...organizational culture is the “personality” of the organization. It is the “chemistry” that arises between the interaction of the individuals and organizational processes that comprise the operating framework of the firm, all in light of its leadership. Through circular feedback, this chemistry influences how individuals act and make decisions. Organizational culture is indeed vital to a firm’s success. It takes effort to sustain or improve organizational culture and the competitive advantage that it creates. It must be actively maintained and not left to chance.

It takes a lot of effort to properly set organizational culture in the initial stages, and it is even more difficult to maintain it over time. I left HRH in 1999. I then returned to work there in 2001 and by then the decline was evident – employees would routinely do things that would of gotten them terminated in the initial years and the vibe was much different – the focus was no longer on providing an experience and the highest level of service to the clients. A lack of discipline, a lack of training over time, and employee turnover eroded the culture and . The level of talent was no longer evident. The initial strategy of preeminence, genuine empathy for guests, the highest level of service and most importantly, FUN, had eroded down to “just another casino” by the mid 2000's.

Given that organizational culture is a vital driver of competitive advantage in highly competitive markets, executives should thoroughly understand and master what organizational culture is, how to create it, how to maintain it, and how to enhance it.

John T. Bardacino, CAIA

P.S. I recently had some flashbacks to the old days when walking through Vegas's most recent creation, The Cosmopolitan. Cosmo, at least right now, has a nice vibe to it, and I found the staff to be outgoing. Can they continually enhance their organizational culture over time while at the same time deal with financial pressures? Time will tell but I hope they are successful...I miss the old days.

Sunday, April 10, 2011

In part one I said that for a business, or organization, the only true source of long term sustainable competitive advantage in highly competitive markets is organizational culture, or stated otherwise, the personality of the organization.

I defined organizational culture as the “personality” of the organization. Organizational culture is the “chemistry” that arises between the interactions of the individuals' and the organizational processes that comprise the operating framework of the firm, all in light of its leadership. Through interaction and circular feedback, this chemistry influences how individuals in the organization act and make decisions. This chemistry is difficult, if not impossible, to copy, and is the only true source of long term sustainable competitive advantage in highly competitive markets.

Culture at the individual level:

For an individual person, the integration of their personality, unique individual traits & characteristics (idiosyncrasies), values, likes, dislikes, passions, talents, knowledge, etc, and anything else that makes them unique constitutes their “individual culture”. So we will understand an individual’s culture as that which makes them unique. Can your individual culture change over time? Of course it can…. The nature of human beings is that we are constantly learning and changing.

Good researchers understand that because of this, it is very difficult to apply the research methods of the natural sciences to the social sciences. There are no constants when studying human action, in the strict sense of the word. Yes, people do have tendencies to act in certain ways, but human beings are not like a piece of rock in a laboratory setting that can be studied under the exact same test conditions each successive time. Humans continually learn and constantly adjust their Mental Frameworks.

The Importance Of Mental Frameworks:

Human beings have within their consciousness a multitude of Mental Frameworks through which they view the world and

Friday, April 8, 2011

Why apply the concept of competitive advantage to the context of the individual person?

Competitive advantage is vital for a business, but on an individual level it is just as important, if not more so. For the individual, competitive advantage determines success or failure, if an individual achieves his goals in life, and ultimately the satisfaction one gets out of life.

I do not follow golf, but it appeared to me that, until fairly recently Tiger Woods had sustained a strong competitive advantage over just about every other pro – he consistently beat his competitors and set records (prior to self destructing, which is another story...). How did he develop this competitive advantage? From a young age he was immersed in understanding what it took to succeed at playing golf. Certainly, there was a lot of hard work and determination involved, a probable common denominator among competitive golfers. But what was the difference? Through persistence and effort he probably learned how to apply his individual characteristics, talents, and abilities into a unique competitive advantage over the competition.

The need for creating competitive advantage does not arise only out of a desire for success. When an individual or organization is not in tune with their competitive advantage, life becomes a struggle. We feel awkward, out of alignment, and out of tune with our life’s purpose. This leads to unhappiness and misery for the individual. At the business or organizational level it means bankruptcy or death. Please understand that I use the term “competitive advantage” in a positive sense. I do not intend to use it in a sense that would conjure up images of ruthlessly competitive environments or markets where only those who have some kind of “unfair” competitive advantage can survive. In this context, “individual competitive advantage” means leveraging who you are as an individual in order to achieve your goals and add value to the world in the process.

“Understand: you are one of a kind. Your character traits are a kind of chemical mix that will never be repeated in history. There are ideas unique to you, a specific rhythm and perspective that are your strengths, not your weaknesses. You must not be afraid of your uniqueness and you must care less and less what people think of you. This has been the path of the most powerful people in history.” ~ From The 50th Law, by Robert Greene & 50 Cent

Individual (or Personal) Competitive Advantage is what sets you apart, it gives you an edge, it gives you confidence, and it attracts success. It is your style, your way of doing things. It brings out the best in you because it is rooted in who you are as an individual and in a deep understanding of what it takes to succeed. In short, an individual competitive advantage is a result of an optimized synthesis of your individual idiosyncrasies with the competencies that lie within a particular context.

To be successful and create a competitive advantage you must ask yourself the following question relentlessly: How can I apply my unique individual characteristics in order to be successful? Add some passion and determination to this equation and you get a recipe for success.

Although I am not a follower or practitioner of martial arts, I can not help but admire and respect the late, great, Bruce Lee. Lee created his own style of fighting by immersing himself in training and research and understanding all the different styles of martial arts. He mastered the basics and adapted them to his personality and individual physical abilities. He then took what he felt were the best parts of each fighting style and combined them with his own unique talents and creativity to create a new style that was aligned to his unique strengths, in an optimal way, and gave him a competitive advantage, and made him a star. Of course, we see similar patterns among the super successful in just about every context, whether it be business, sports, arts, or some other field.

Whether you are a startup internet entrepreneur who is the sole employee of your own business, an athlete looking for an edge in your next competition, an actor, actress, rock star, or a hedge fund manager, in order to achieve success you have to know how to apply your unique talents and passions to the area that you are looking to excel in. No matter what you are trying to be good at, if you want to excel over the long term you need to create your own unique sustainable competitive advantage.

A further explanation of Competitive Advantage:

When one thinks of “competitive advantage” what usually comes to mind is the business world and how a firm can develop a “sustainable competitive advantage” that allows it to consistently gain above average profits within its industry. A business without a competitive advantage is doomed and will eventually fail, as competitors will eat away at its market share. Here I refer to competitive advantage on two different levels

2 Negative geopolitical event/ worsening or negative outcome of a revolution in a middle eastern country (Libya, Saudi, etc...).

3 Ben Shalom Bernanke opening his mouth in front of Ron Paul or Paul Ryan during one of the upcoming hearings.

4 Or any one of a number of economic issues in the USA or Europe, there really are too many to list....

Collective Attention: when it turns, the trend changes....

FED liquidity via POMO debt monetizations is sure to continue for at least a few more months, providing some support to those buying the dips. But if market players have their collective attention and "awareness" fixated on a new round of QE (quantitative easing), and lose confidence in the reflation theory, that attention is likely to turn to something negative for a period of time longer than it takes to enter an order to "buy the f**ing dip." And when that moment comes, a meaningful downside correction will occur. When do we reach this point? Obviously no one can predict the specifics of the future, but we can predict its nature...and we can judge when the probability of the occurrence of an event is increasing.

Similar to the small child in the backseat of the car who keeps asking "are we there yet?" bears have been asking "is the top in yet?" and have been predicting the demise of this bull market for quite some time. At the time of writing this post, price action is still bullish, and dips will continue to be bought until collective attention no longer warrants it. Technically the price action on the equity indexes is mostly positive, but it is important to note that dramatic trend changes usually occur when least expected, hence the need to utilize a trading strategy that is properly aligned to market conditions and risk levels.

Would you want to buy and hold for the long term at these levels? Perhaps there are some dividend paying large caps stocks that can be considered value plays but in my view the only answer is vigilance and agility, and the ability to exploit price action and the volatility that drives it, and I continue to favor short term trades in both directions utilizing option spreads.